Greedy insurance companies, health care providers, pharmaceutical companies, and doctors in 10,000 square foot mansions make convenient targets for the escalating health care costs.  One could also fault intrusive government regulations and mandates and a few may actually credit the higher costs with the fact that health care quality has increased enormously, in spite of the myths and propaganda to the contrary.

Even if the government thinks its heavy hand can overcome these cost drivers without sacrificing the quality of care, bending the curve- to use its lingo, the market is so complex that it will not likely deliver the quality of care without incurring enormous costs elsewhere.  But what if the changes the government seeks to invoke at great cost to our purse and our liberty have nothing to do with the core of the problem?

This is addressed in The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t by William J. Baumol and others.

The less obvious reason for the rise  in health costs care  may lie in the enormous increase in the productivity of the rest of the economy.

As productivity in the manufacturing and service sectors has allowed for increases in the pay of those workers, pay in the more stagnant sectors has kept pace to some degree to avoid undesirable discrepancies.  But productivity in “craftsman” like sectors like health care and education is still delivered on a relatively personal basis and is thus unable to take advantage of the cost savings of improved labor productivity.  When productivity was low this discrepancy was not a problem.

A cellist in an orchestra can only play so fast and can perform only so many concerts a day. Increases in productivity will never be able to apply to all economic sectors equally.  While this may seem bad when you examine only a single sector, it is not a bad thing when you examine the overall economy.

The good news is that while health care costs (and education and performance arts costs) continue to climb, our ability to pay the higher costs also improves as a result of our higher total overall productivity.  It is not a crime to pay a higher percent of our disposable income in health care because we spend a much smaller percent of our income on other areas like technology and food.

This does create a problem, however, for the poorest Americans and some form of subsidy is probably necessary. But I would argue that this does not justify a wholesale restructuring  of the entire industry.

Those countries that have subverted their health care market to government control are experiencing the same increase in health care costs.  It is not because of lack of effort but the cost disease will persist in any country where there is a natural increase in the gap between the growth in productivity between the stagnant and non-stagnant sectors of the economy. It is less of a problem in poorer countries with lower overall productivity, but the quality of healthcare in those countries also suffers.  Equal or free access does not mean better quality.

The problem is not that free markets do not work in health care, the problem is that free markets work so well in the rest of the economy.  Efforts to frustrate consumer choices and drive costs down by dictate will either make costs go up or quality go down.

We can not get a better cure for our health care problems until we get a better diagnosis.